Second Mortgage in Charge-Off Status

What are the ramifications of a second mortgage in charge off status?

My husband is unemployed and we have fallen behind on our first and second mortgage. We have a plan setup that should take care of the first mortgage, but our second mortgage is in charge-off status. My question is would it be okay to let it get charged-off? What are the ramifications of this?

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Bill's Answer
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Highlights


  • If you default on your second mortgage, the mortgagee can foreclose.
  • Try to work out a forbearance plan.
  • Bills.com offers additional information for people in default on their second.

Before addressing the central issues in your question, let us define charge off.

Charge Off

Charge-off (sometimes called write-off) is an accounting term used by creditors when they move a delinquent account from its accounts receivable books to its bad debt ledger. This usually occurs between 180 and 240 days from the date of the last payment. The fact an account is charged-off does not mean the debt may not be collected later. The charge-off date also does not correspond to the statute of limitations on collecting a debt, or the date that an entry on a credit record must be removed. All three dates or deadlines are independent of each other and have different meanings. I explain more about the ramifications of a second mortgage in charge-off status in just a moment.

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A charged-off account does not mean:

  • The debt is canceled
  • The debt is forgiven
  • The creditor forfeits a right to collect the debt

The creditor may move a charged-off account to its own internal collections department, or sell the debt to a third-party collection agency.

Second Mortgage Foreclosure

Home loan lenders have the right to foreclose if you fail to make your payments for any mortgage. The fact a second mortgage is in a junior position to the first mortgage does not prevent the second mortgage lender from foreclosing.

Try to work out some sort of a payment arrangement with your lender for the second mortgage to avoid a foreclosure. The foreclosure process varies from state to state, but generally takes from two to 18 months depending on the terms of your loan and your state of residence. However, a good rule of thumb is the bank can proceed with the foreclosure process if mortgage payments are not received within 150 days. See the Bills.com Foreclosure Rules resource to learn the specific rules for your state.

If a foreclosure occurs, the second mortgage is paid after the first mortgage is repaid in full. If the sale price is less than the value of the mortgages held against it, then in most states you will owe a deficiency balance. The good news is a deficiency balance (if it exists and if your lenders pursue collections) is an unsecured debt you can enroll in a debt settlement program. However, some states outlaw the collection of mortgage deficiency balances. See the Bills.com Anti-Deficiency resource to learn the rules for your state.

Quick Tip

Wrestling with a tough unsecured debt problem? Take your questions to the Bills.com Debt Coach for an online, no-nonsense, no-cost analysis of your options and the cost of each.

Here is the good news: Lenders don’t like to foreclose on mortgages. Foreclosures are costly, so lenders foreclose only as a way of limiting losses on a defaulted loan. If homeowners get behind on payments, lenders will most likely work with them to bring the loan current.

To do so, however, communicate with the lender and be honest about your financial situation. The lender’s willingness to help with current problems will depend heavily on past payment records. If you have made consistent, timely payments and had no serious defaults, the lender will be more receptive than if the person has a record of unexplained late payments. If you are falling behind in payments or who know you are likely to do so soon, contact your lender right away about meeting to discuss alternative payment arrangements.

Loan Workout Plan

An agreement between borrower and lender to prevent the loss of a home is called a loan workout plan. It will have specific deadlines that must be met to avoid foreclosure. Therefore, it must be based on what the borrower really can do to get the loan up to date again. The nature of the plan will depend on the seriousness of the default, prospects for obtaining funds to cure the default, whether the financial problems are short-term or long-term, and the current value of the property.

If the default is caused by a temporary condition likely to end within 60 days, the lender may consider granting temporary indulgence. Those who have suffered a temporary loss of income but can demonstrate that the income has returned to its previous level may be able to structure a repayment plan. This plan requires normal mortgage payments to be made as scheduled along with an additional amount that will end the delinquency in no more than 12 to 24 months. In some cases, the additional amount may be a lump-sum due at a specific date in the future. Repayment plans are probably the most frequently used type of agreement.

Foreclosure, Generally

Foreclosure is a serious situation that has serious repercussions. If you can, you want to avoid a foreclosure as much at all costs. Bills.com is here to help. We also offer helpful guides, foreclosure FAQs, glossary terms, and other helpful tools to help you keep your home and avoid a bank repossession.

You can find more in depth information about foreclosures on our Bills.com foreclosure information page. See also Home Affordable Foreclosure Alternatives Program.

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com

267 Comments

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  • SN
    Mar, 2013
    Stacy
    My situation is slightly different. I live in AZ and have rec'd 1099-C Cancellation of Debt, but I have not rec'd a Release of Lien. After speaking with BOA, it appears as though they will not to send me one. Bank of America says, "Just because they forgave the debt doesn't mean they will release the lien until the debt is paid in full."

    Any suggestions as to how to obtain a Release of Lien or a Release Certificate so I can refi and get away from Bank of America?

    Thank you for this type of forum! as most of us can't afford to hire and attorney and need to do this leg work ourselves.
    0 Votes

    • BA
      Mar, 2013
      Bill
      What you are experiencing with the 1099-C would not be out of place in Alice In Wonderland. Bank of America's explanation is accurate: A lender that issues a 1099-C may continue to pursue the borrower to collect the debt. Of course, this seems absurd because the 1099-C's title contains the plain language "Cancellation of Debt," which anywhere else in the English-speaking world would imply the lender abandoned hope of collecting the debt and declares to the federal government the IRS should consider the amount cancelled as income for the borrower. But no, that's not quite what a 1099-C means. Borrowers still owe a debt "cancelled" in a 1099-C.

      You asked how to rid yourself of the loan and lien. You have two options:
      • Negotiate a settlement for less than the balance due. You have some leverage now that Bank of America has written-off the loan and has moved it out of its current accounts ledger.
      • Talk to a bankruptcy lawyer to learn if filing a chapter 13 would strip the lien on what I assume is a junior mortgage/deed of trust.
      0 Votes

  • SB
    Jan, 2013
    Susanna
    Hi, I just wrote a few minutes ago and wanted to add that both my 1st and 2nd mortgages are with Chase. The guy on the phone that told me a payment in full or a settlement was the only way to avoid foreclosure said "look at it from our point of view, you have equity in your home, you could sell it, pay it off, and still walk away with money." We want to stay in our home. We've lived here many years, and could never buy in this neighborhood again. Where would we go anyway? We could afford to buy another house, or get a loan!
    0 Votes

    • BA
      Jan, 2013
      Bill
      For the benefit of other readers, whether the personal liability for a junior mortgage or deed of trust is discharged in a bankruptcy, a homeowner stopping their monthly payments allows the mortgage lender to foreclose. Again for the benefit of other readers, always consult with your bankruptcy lawyer about which payments you should and should not make when you file a bankruptcy. Failing to do so can result in unintended consequences, as Susanna's comments here illustrate clearly.

      Susanna, consult with your bankruptcy lawyer immediately, and ask him or her to negotiate a settlement with Chase on the junior mortgage. The good news here is the Chase representative indicated a willingness on the part of the lender to negotiate a settlement. By all means, take them up on the offer and have your lawyer start talking to Chase now.
      0 Votes

  • SB
    Jan, 2013
    Susanna
    I just went through bankruptcy, it was discharged a few months ago. Reaffirmed my home with approximately 90,000 left on the mortgage. Also have a second mortgage (home equity loan) that I owe almost 30,000 on. My home is valued at approximately 180,00 - 200,000. First mortgage payments have been paid on time for years, the Home equity payments also, until the time of filing more than a year ago. We stopped making the home equity payments when we filed because we thought that portion was being discharged (not sure why we thought that). We just called the bank (Chase) to find out how to pay and get caught up and were told it was too late, it has been charged off and would be forclosed! We have enough money to make all missed payments and income to resume the loan, but they said no. They said they may make a settlementand to send them an offer. We are not sure what to do, as we only have around 5000. I'm sure no one would lend us the money this close after foreclosre. Any advice?
    0 Votes

  • JT
    Jan, 2013
    J
    My boyfriend did a HAFA modification of his 1st mortgage. His 2d mortgage is with BOA. They sent him a letter stating that his 2d mortgage didn't qualify for a HAFA modification because his payment was under $100/mo. He just got a letter stating that his 2d mortgage has been "charged off" asking him to contact BOA to work out a payment arrangement. The letter states that a payment must be made within 10 days of the date of the letter. Thing is that he received the letter 11 days after it was dated. Thoughts? Strategy? Amount owing is $20K. House might be worth what the 1st mortgage balance is but is more likely slightly underwater. Do you think an offer of 10% of the balance would fly? If they take the offer do they have to relinquish the lien?
    0 Votes

    • BA
      Jan, 2013
      Bill
      I recommend contacting the bank as soon as possible, explaining that the letter was just received, and working to reach an agreement. In terms of the percentage to offer, there is no fixed amount. Start low, at 10-15%. You can increase the offer, if necessary but not reduce it. If the agreement is to settle the debt in full, bringing it to a $0 balance, the lien would not remain in force. Get any agreement in writing and keep the correspondence, so you can prove that the debt was settled, in case you need to demonstrate that to another creditor.
      0 Votes

  • KY
    Oct, 2012
    kay
    have 2nd mortgage on house. Will not sign subordination agreement. Have 1st mortgage going through mod, but need subord agreement from 2nd mortgage to make final. If 2nd mortgage wrote off loan, can I take this information ie credit report to title company and have them refile a title taking 2nd mortgagee off lien?
    0 Votes

    • BA
      Oct, 2012
      Bill
      Even if the second mortgage writes-off the loan, it is not forfeiting its lien position. I don't believe there is much you can do short of paying off the second or settling it for a reduced amount that brings the debt to a $0 balance.
      0 Votes